Plan now for new Net Investment Income tax

Will you owe Net Investment Income tax?

by Sue Miller, CPA


Many taxpayers will see an increase in their 2013 taxes due to the new Net Investment Income tax (NII). This tax was enacted to offset costs of the Affordable Care Act. It applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts with income above the threshold amounts.

Estates and Trusts will be subject to the NII tax if they have undistributed NII and also have adjusted gross income in excess of the highest trust tax bracket for that taxable year. The threshold for 2013 is $11,950.

Individuals will owe the tax if they have NII and also have modified adjusted gross income (MAGI) over the following thresholds:


This 3.8% tax is applied to the lesser of:

  • MAGI in excess of the above thresholds
  • Total NII

For example a married couple filing jointly with MAGI of $275,000 and NII of $20,000 would pay an additional tax of $780 (NII X 3.9%). If the same individuals’ MAGI were $260,000, they would pay an additional tax of $390 ($260,000 – 250,000 = $10,000 X 3.9%).

The difficulty in planning for and assessing this additional tax will be the identification of NII, including both the determination of investment income and qualifying offsetting expenses.

Regular or Net Investment Income?

The following table categorizes common income sources as either regular or NII. It is not exhaustive but serves to illustrate the two categories. The total of these two sources is the MAGI amount.


Sale of Personal Residence

There has been some concern regarding the new NII tax as it relates to the sale of a personal residence. Currently, an individual homeowner may exclude up to $250,000 of the gain from a sale, and joint owners can exclude up to $500,000. The NII tax does not change the exemption or the amounts. The NII tax will only be applied to the taxable gain above the exemption amounts.

Passive Versus Active Business Activities

Passive businesses are those in which neither the taxpayer nor the spouse is actively engaged in the business. Income and gains from passive business activities will be categorized as NII. For example, rental income to most individuals will be passive and subject to the NII tax. But rental income that flows to someone in the real estate business will be classified as active (regular) income. The NII tax increase makes the passive versus active designation more important than ever.

Allocation of Expenses in Calculating NII

In arriving at NII, the following items related to gross investment income may be deductible.
• Investment interest expense
• Investment management and brokerage fees
• Expenses related to rental and royalty income
• State and local income taxes

The form for Net Investment Income was released by the IRS in August, 2013. However, form instructions are not yet available as of the date of this article so there is still some clarification needed regarding these allocations.

Now is the time to contact your tax planner to determine the potential impact of the new NII tax. Consideration should be given to total income for the year as well as identification of income that may be taxed at the higher rate. As previously mentioned, care must be taken in classifying business activities as active or passive. The timing of capital gains will impact the MAGI of the taxpayer, but may also affect the application of the NII tax.

The NII tax is also subject to estimated tax provisions and taxpayers will want to consider whether or not to increase their withholding rate or estimated tax payments.

If you would like to learn how the NII tax might affect your 2013 taxes, and what you can do about it now, please contact your Brady Ware advisor or you can contact Sue Miller at 765-935-8219 or

Dayton – 800.893.4283

Columbus – 866.502.8555

Richmond – 800.515.5536

Atlanta – 404.257.9475

Leave a Reply

You must be logged in to post a comment.